One Cheer for Clinton's Social Security Plan

About the Author

President Bill Clinton is considering a plan to use
the budget surplus to fund new retirement savings accounts to
supplement Social Security. Although the President's plan has some
good points, Congress would need to correct several weaknesses for
it to become the basis for serious long-term reform.

Details are vague, but the plan appears to
use the federal budget surplus--estimated at $76 billion this
year--to create the new retirement savings accounts. It is not
clear whether every American would qualify for these accounts, or
only those who fall below a certain income level. The surplus
probably would be used to start the accounts, but future payments
to them might be made as either an annual lump sum or a federal
match of what the owner had saved. How to administer the accounts
and invest their funds is still being discussed. One version would
make the accounts voluntary.

Positive Features

The
President's proposal clearly shows that the White House recognizes
several truths about how to save the Social Security system and
several core principles for reform:

Using the surplus to save Social
Security would mean creating personal retirement accounts.
President Clinton understands basic math. He realizes that most
working Americans would receive far higher benefits if they could
invest their Social Security retirement taxes in personal
retirement accounts. Even a conservative portfolio divided evenly
between stocks and super-safe government bonds would yield returns
of 5 percent, far more than Social Security's current average
annual return of 1.2 percent. The alternatives--raising taxes or
reducing benefits--would force Americans to pay more and get less,
making Social Security's weak returns even worse.

Social Security cannot pay all the
benefits it has promised. President Clinton knows that Social
Security simply will not have the resources to pay all the benefits
it has promised. He recognizes that Americans need the security of
private investments to supplement basic Social Security
benefits.

Americans should be able to use Social
Security to create wealth. President Clinton recognizes that
Social Security should allow workers from all income levels to
create a nest egg to use for their retirement or their family's
future. Americans should have more to show for a lifetime of work
than memories and a small monthly check.

Government investment is a bad
idea. The President agrees with the Congressional Research
Service, Federal Reserve Chairman Alan Greenspan, and others that
having the government invest the Social Security trust fund simply
would not work and could threaten the economy by politicizing
investment decisions.

Personal retirement accounts are
feasible, cost-effective, and safe. President Clinton knows it
would be fairly simple to solve the logistical problems associated
with creating personal retirement accounts, and that these accounts
could be structured to be both inexpensive and low-risk. Workers in
three Texas counties already manage their own Social Security
investments with high returns, and other Americans can, too.

Gaps in the Proposal

But the President's plan contains glaring
gaps that must be addressed:

Supplemental accounts would do nothing
to improve Social Security. Using the budget surplus to create
supplemental accounts would not solve any of the problems facing
Social Security. The program still would not have the necessary
resources to pay all the benefits it has promised. Supplemental
accounts also would do nothing to raise Social Security's
underlying rate of return or make it a better deal for workers.

Supplemental accounts would not answer
the question, "What happens when the budget surpluses end?"
Experience suggests that the era of budget surpluses will be fairly
short--about five years. When the inevitable economic slowdown
hits, deficits will return, and contributions to the supplemental
accounts will stop. Americans need to know they can count on these
personal accounts in the future; their retirement security cannot
be dependent on the ability of the federal government to balance
the budget. Congress needs to make personal accounts permanent
without raising taxes on workers.

Supplemental accounts would be too
small to help most Americans. If the budget surpluses for the
next five years were used to create supplemental accounts, the
average 21-year-old would receive an extra $54 per month on top of
Social Security at the time of retirement, which represents an
increase of only 4.5 percent; a 35-year-old would receive an extra
$35 per month; and today's 60-year-old retiree would receive an
extra $16 per month. It would be far better to apply the surplus
toward real reform of Social Security that would improve the living
standard of future retirees.

Voluntary accounts would help primarily
the well-to-do. Low- to moderate-income workers--who need
additional retirement income the most--would be least able to put
money into a voluntary account when surpluses end. Even with tax
incentives and federal matches, their income already goes to house
payments, living expenses, and doctor bills for their children.

Necessary Additions to the
Plan

Congress could improve the President's
proposal by making a few simple changes:

Make the accounts part of Social
Security. Instead of creating a whole new program, it would
make much more sense to make these accounts part of Social
Security. The new "Social Security Part B" would encourage Congress
to consider these accounts as part of a comprehensive solution to
deal with Social Security's existing problems and enhance the
retirement security of all Americans.

Earmark a part of the existing tax to
continue the plan. The government should fund the accounts with
the surplus and then shift to funding them with a portion of the
taxes that workers already pay to Social Security. That way, once
the surpluses end, the accounts could continue to grow, and the
higher returns they earned would allow workers to increase their
retirement incomes significantly.

The
President seems sincere in his desire to find a real solution for
Social Security's problems. Unfortunately, supplemental accounts,
at least as he has proposed them, will not do the job. Avoiding the
hard choices necessary to save the system will make the situation
only worse and place future Social Security retirement benefits in
greater jeopardy.

David C. John is Senior Policy Analyst
for Social Security at The Heritage Foundation.